Friday, May 10, 2013

Top Line Revenue is Today's Telco Problem; Will Tomorrow's Problem be Bankruptcy?

It would not be unfair to note that most European fixed line telcos now are facing a revenue decline of significant proportions. BT Group’s revenue fell five percent, year over year, for the period ending March 31, 2013. 

Underlying revenue excluding transit, was down three percent . 

Deutsche Telekom revenue declined 4.5 percent, year over year, its most-recent earnings report showed.

Telefónica had similar issues in the first quarter. Revenues were down 8.8 percent, or down 1.6 percent on an organic basis, not including currency effects. The bright spot was Telefónica Latinoamérica, which accounted for 51 percent of consolidated revenues and grew nearly three percent, year over year.

To be sure, European telcos are dealing with unhelpful changes in wholesale tariffs and roaming revenue, plus sluggish economic conditions. The longer term issue is what will constitute a “turnaround” in fortunes, and whether such a turnaround is possible.

Executives remain optimistic: they have to. Telcos can point to tough economic conditions, which is true enough. They will rightly note the impact of mandatory price reductions in the wholesale part of their businesses. 

But consumers are behaving differently: they are talking less, texting less, dropping landline service. 

European telco executives argue that consolidation is needed to help shore up business cases. That's likely true enough. Also, operating costs are simply too high, and it isn't so clear how much control the carriers might have in that regard. Most tier one service providers have huge pension obligations and many face pressure from governments not to cut jobs. 

But the bigger problem is the erosion of customers and the gap between new revenue sources and legacy sources. No major telco has gone bankrupt yet. But that is not an impossibility. 

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